Although banking stakeholders and global regulators have been contesting with technology companies' ongoing evolution into financial services providers for some time, Facebook's unveiling of Libra turned more heads and sparked more heated conversations than arguably any tech-led initiative before it. Falling in step with the first portion of Zuckerberg's storied (and now retired) 'move fast and break things' mission statement, the announcement of the company's global cryptocurrency and blockchain-based payment system appears on its face to be significantly ahead of what decision-makers in the global economic system feel ready for. Even Facebook and its Libra-focused subsidiary, Calibra, have looked largely unprepared for the reaction the announcement has received.

Tasked now with navigating the noise and obstacles and pushing forward, Facebook and the Libra association are seeking to ride out the initial storm and make sustainable headway on the project. Here, we will look to root out misconceptions on the announcement, outline real concerns and pinpoint advantages of a Libra-like network as well as give a realistic picture of the initiative's prospects.

The 451 Take

Despite the ugly and in many ways warranted public reaction Libra has seen since its unveiling, the problematic but visionary project has revealed two important details about the future of payments. The first is the legitimate appetite and readiness of enterprises and fintechs to participate in new payment systems built on blockchain. Although PayPal, Mastercard, Visa, eBay and Stripe have all decided to leave Libra, their original interest is a clear sign that each is continuing to envision and plan for their role in a Libra-like ecosystem. The second is that this will not be a one-time event. New payment systems heralded by non-bank providers will continue to emerge, challenging the status quo in payments and financial services. With China's upcoming unveiling of its own digital currency and other governments and companies signaling that more similar initiatives are on the way, Libra will not be alone.

What is Libra?

Defined in its launch white paper as a simple global currency and financial infrastructure that empowers billions of people, Libra is actually quite complex in structure, mission and scope. At its core, Libra is a cryptocurrency built on a blockchain. It is backed by a reserve of existing assets (the 'Libra Reserve') and governed by an independent group of members known as the Libra Association. The Libra currency (a 'Libra') and network (the 'Libra Blockchain') is built in many ways to succeed where bitcoin has struggled.

While bitcoin fails to gain widespread traction as a currency due to dramatic value fluctuations, the Libra Association backs each unit of currency (a Libra) with low-volatility assets, including short-term government securities and bank deposits, held in reserve. Originally planned to be tied to a basket of trusted global currencies in order to maintain a stable but floating value, the association has pivoted, planning to peg Libra at a 1:1 rate to the US dollar or even launch multiple stable coins tied to individual currencies.

Another key point of differentiation is the style of self-governance for the network. Straying from bitcoin's permission-less blockchain in which validation is achieved by public access to the transaction ledger, Libra will start as a permissioned blockchain in which the ability to create a validation node is granted by the association via a vetting process. While looking to transition into a permission-less network down the line, this initial structure is set up to ensure scale, stability and security until a viable permission-less structure is designed.

Governing the network and overseeing its development is the Libra Association, based in Geneva, Switzerland. It comprises a combination of private and public companies, non-profit organizations and academic institutions and charged with facilitating the operation of the blockchain, maintaining and expanding the underlying and overarching infrastructure and managing the reserve. Libra was announced on June 18, with 28 founding members and aspires to grow the group to 100 members by the planned Libra launch in 2020. In addition to Facebook, current members include household names such as Andreessen Horowitz, Lyft, Spotify, Uber and Vodafone.

Where Libra Stands Today

Little has gone as planned since Libra's unveiling. Heavily criticized by governments and the crypto community alike, the association, now standing at 21 members, appears to be swimming upstream against a heavy current. Much of this early unraveling has been due to staunch opposition from international politicians and regulators. Concerned both by Facebook's shoddy track record surrounding data privacy and by the implications of such a wide-reaching financial system, the project has received a barrage of rebukes concentrated in the US and EU. While some US politicians have actively warned American businesses against involvement in the project, France and Germany have placed bans on the currency, going so far as to say that the reach of the project threatens the monetary sovereignty of states.

In reaction to the growing uncertainty and criticism surrounding the project, early support from large fintech and financial service players has wavered. Founding members including PayPal, Mastercard, Visa, eBay and Stripe have left the association, citing a lack of regulatory clarity and the project's increasing distraction from their own developments in payments. Adding that their departures do not signal an unwillingness to re-approach the project in the future, the companies have chosen to sit out the early stages, staying clear of governmental and PR fire while refining their eventual crypto strategies.

Libra, meanwhile, has attempted to hit the reset button, going forward with a 21-member association in October. Stating renewed commitments to a long and sustained journey of hard work, the members have (each with a single vote) elected five of nine eventual board members, leaving space for future entrants. The next step in the process will involve the leadership committee finding and recruiting a head for the association. Other priorities include surrounding the organization with the proper talent and resources.

Libra's Prospects

To gain a clear view of Libra's prospects, we need to first look at the project's lofty yet laudable stated mission. In Libra's founding white paper, the network is positioned as a way to provide global unbanked and underbanked populations with the ability to safely, securely and cheaply store and send funds. To do this, Libra is leveraging the global proliferation of smartphones, aiming to create a wide-reaching competitive network of digital wallets (such as Facebook's Calibra) overlaying a uniform monetary unit (the Libra) to theoretically provide international coverage and access. This would in turn potentially alleviate issues such as high cross-border transfer fees for remittances that are currently seen in the financial system today, as well as provide a path away from unsafe and unstable cash-only communities. Libra also shows potential as a platform for providing access to loans and cheap capital.

However, achieving these goals appears increasingly challenging, given initial reactions to the project from top global governments. While members and particularly Facebook stakeholders have been quick to minimize the comments and blowback as political noise, gaining support or at least a path forward in these markets will be critical to the network's success. While the project's mission statement revolves around providing financial tools to underbanked communities not necessarily located in these established economic centers, Libra's core value lies in universal or near-universal acceptance and distribution. Without permission from top governmental bodies, it will be nearly impossible to foster a global value proposition, significantly constraining the market potential for its core use cases.

The path to shifting these initial opinions and unlocking international markets is complex. To do so, the association must address four fundamental concerns of governments and regulators. The first is the notion that Libra could become a super sovereign currency, displacing the use of existing national currencies. The second revolves around user data privacy and the separation of transaction data from commercial opportunities. The third is the potential risk of criminals and terrorists using the network to shield their actions. The fourth is the monetary policy power the association could wield with a large and growing reserve underpinning the Libra network. While the Libra team has already begun to verbally address these issues with moves such as tying Libra to the US dollar or launching multiple stable coins and stating a desire to have regular and stringent audits of the project, much more work and lobbying is needed to move the needle.

One external factor that could have surprising implications for Libra are the developments in China surrounding the government's plan to offer a digitized version of the renminbi. While not the only government playing in the crypto arena, China has quickened the pace of its yuan-based project following the Libra announcement. Fairly cold on cryptocurrencies since their inception, the Chinese government sees the potential transformation as a natural progression for an economy that is built around cash and digital wallets already. While the project would have significant implications within China, where the Facebook ecosystem is banned, it could also grow internationally, creating an impetus for international governments to seek an alternative. It may also help set expectations for what a ledger-based digitized currency and payment network could look like.

Facebook's Role

Since Facebook's initial role as creator and instigator of the Libra project and association, the company has done everything possible to step back and separate itself from the leadership and trajectory of the organization while still acting as its chief evangelist. Driven to do this in large part by critics' distrust of the company and doubts over whether Facebook can isolate the project from its core advertising business, this strategy has created a proxy struggle between regulators and the tech company. Within the Libra Association, Facebook holds just one of 21 member votes on all organization-wide decisions and has stated that the eventual leader of the association will not be an employee, according to David Marcus, head of Facebook's Libra-based digital wallet project Calibra.

While Facebook is working hard to highlight the neutrality and openness of Libra's leadership and infrastructure, it has been notably bullish when discussing the advantages that its proprietary digital wallet Calibra has in Libra's competitive wallet ecosystem. Holding up the distribution capabilities of the Facebook social platforms as a chief value add, Calibra is at work building P2P and small merchant payment capabilities across its Facebook, Messenger and WhatsApp applications.

In addition to Facebook, Messenger and WhatsApp, the Calibra team is building a separate mobile app to enable non-Facebook ecosystem users. User verification for Calibra will require a valid government ID and the company will offer 24/7 customer support. To dispel concerns around fraud, Calibra is offering full refunds in instances of fraud.


The Road Ahead

Hardly a surprise, the swell of public outcry from government bodies and the public against the initiative could easily signal the end of what is a fairly novel concept in Libra. However, David Marcus and other project stakeholders appear prepared to attempt to right the ship in the face of adversity. The short-term objectives for the association now include shrugging off the initial rocky public reaction and re-engaging members and potential members while continuing to build out the network's underlying infrastructure. Seeking to calm the waves created by the announcement, David Marcus of Calibra has sought to reset expectations preparing onlookers for a lack of announcements over the coming months. This sea change in approach will look to give the association time and space to reorganize, build out tools and re-approach global regulators on a steadier footing.
Cam O'Shaughnessy
Associate Analyst

An Associate Analyst in 451 Research’s Customer Experience & Commerce Channel, Cam O'Shaughnessy covers the digital commerce ecosystem, including e-commerce, mobile payments and omni-channel commerce. Additionally, he contributes to the design and writing of the consumer insight-driven VoCUL (Voice of the Connected User Landscape) Digital Wallets survey product.

Jordan McKee
Research Director

Jordan McKee is a Research Director for Customer Experience & Commerce, and also leads 451 Research’s coverage of the payments ecosystem. He focuses on digital transformation across the commerce value chain, with an emphasis on the major trends impacting payment networks, issuing and acquiring banks, payment processors and point-of-sale providers.

 Csilla Zsigri
Senior Analyst - Blockchain & Distributed Databases

Csilla is a senior analyst for 451 Research’s Data, AI & Analytics channel. She currently focuses on decoding the blockchain market to help replace confusion and complexity with an examination of the technology, the competitive landscape and available solutions that are driving the market, as well as real-world use cases and deployments.

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